Tata Steel UK - End Of An Era Of Cash Losses: Prabhudas Lilladher

Prabhudas Lilladher Report

Tata Steel Ltd. has announced a proposal to setup a three million tonnes per annum Electric Arc Furnace at its Port Talbot steel making facility for capex of £1.25 billion. The proposed project will get £500 million grant (40% of the project cost) from UK government and adequate policy support for smooth transition to green steel making in UK at competitive landscape.

While first stage of the process stands complete with this agreement, consultations with unions involved are expected to close in next three months.

Capex is planned over next three years post successful consultation and subject to relevant regulatory approvals. We believe that the Tata Steel UK transition is earnings per share accretive given-

1. current cash losses will end, as company will import substrate instead of producing at old facilities,

2. one-time cost will exist, but Tata Steel UK is expected to be in better situation than earlier case of recurring cash burn,

3. volatility in coking coal prices won’t directly affect Tata Steel UK earnings, and

4. likely fall in energy costs, as UK moves towards renewable sources.

We revise our FY25E Ebitda estimates upwards by 5% to Rs 411 billion and introduce FY26E earnings estimates. Maintain ‘Buy’ at revised target price of Rs 144 (Rs 137 earlier) assigning enterprise value/Ebitda multiple of five times for FY25E Ebitda for Tata Steel Europe.

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